Download The model of aggregate supply and aggregate demand in the short

Final Exam (2012) - Macroeconomics (40 points) – Type A
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Answers to the multiple choice questions: (20 points)
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1. When the government increases it spending and the central bank increases money supply, what
would be the effects of on income, consumption, investment, prices in the short run? What about in
the long run? Explain using the IS-LM model and AD-AS model simultaneously. (10 points.)
2. Should policy be active or passive? Give at least three explanations why some economists argue
that macroeconomic policy should be passive. What is your opinion about this debate. (10 points.
Please write your answer in the back page).
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Multiple choice questions. (10 points)
1. In the Keynesian cross model of Chapter 10, if the MPC is 0.8, and government expenditure is
decreased by $100 and taxes are also increased by $100, respectively, how much does income change?
(1) It increases by $100.
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(2) It decreases by $100.
It decreases by $900.
(3) It increases by $500.
(5) It increased by $1,000.
2. If there is an exogenous increase in the investment, then
(1) the LM curve will shift to the left and the AD curve will shift to the right.
(2) the LM curve will shift to the right and the AD curve will shift to the left.
(3) the IS curve will shift to the right and the AD curve will shift to the right.
(4) the IS curve will shift to the left and the AD curve will shift to the left.
(5) the LM curve will shift to the right and the AD curve will shift to the right.
3. In the IS-LM model, when the MPC is 0.8, and the government increases its spending by $100, how
much does income change?
(1) It decreases by $500.
(2) It decreases by less than $500.
(4) It increases by less than $500.
(5) None of above.
(3) It increases by $500.
4.Which of the following statements is FALSE about the IS-LM model?
(1) The IS curve represents equilibrium in the goods market and the LM curve represents money market
equilibrium.
(2) The equilibrium condition in the goods market is:
Y  C (Y  T )  I (r )  G
(3) The IS-LM model explains the supply-side equilibrium condition of the economy.
(4) The equilibrium condition in the money market is:
M P  L (r ,Y )
(5) The intersection determines the combination of Y and r that satisfy equilibrium in both goods and
money markets.
5. Which of the following is endogenous in the IS-LM model?
(1) money supply
(2) taxes
(3) The income level
(4) the price level
(5) government expenditure
6. If the government increases its tax revenue and the central bank increases the money supply, then in the
IS-LM model the combined effect of these two policies would cause
(1) interest rate to decline and income to fall.
(2) interest rate to decrease but income cannot be determined from the information given.
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(3) interest rate to increase but income cannot be determined from the information given.
(4) income to decrease but interest rate cannot be determined from the information given.
(5) income to increase but interest rate cannot be determined from the information given.
7. The model of aggregate supply and aggregate demand in the short run differs from our long-run model
of the economy because, in the short run
(1) the interest rate is fixed.
(2) output is fixed.
(4) employment is fixed.
(5) everything is fixed
(3) prices are fixed.
8. If the short-run AS curve is horizontal and the long-run AS curve is vertical, then an increase in the
government spending will
in the short run and
in the long run.
(1) increase only prices; increase only output.
(2) increase only output; increase only prices.
(3) decrease only prices; decrease only output.
(4) decrease only output; decrease only prices.
(5) increase both prices and output; only prices.
9. Which of the following statements is CORRECT?
(1) The outside lag is the time between a shock to the economy and the policy action responding to that
shock.
(2) The inside lag is the time it takes for policy to affect economy.
(3) Because of the existence of the inside lag and the outside lag, the stabilization policy can easily
stabilize the economy.
(4) Monetary policy has a much longer outside lag than fiscal policy.
(5) None of above
10. Which of the following statements is NOT true regarding the arguments regarding stabilization
policy?
(1) It consists of fiscal policy and monetary policy.
(2) It aims at stabilizing business cycles.
(3) Proponents of active policy argue that recessions cause economic hardship for millions of people and
therefore the government should do some active role.
(4) Opponents of active policy argue that economic forecasts are often wrong.
(5) Proponents of active policy argue that automatic stabilizers such as income tax and unemployment
insurance are strong enough to stabilize the economy.
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